NICOSIA, Cyprus—Cypriot leaders on Sunday raced to prevent a meltdown in the island’s financial sector when banks reopen for business after a three-day bank holiday Tuesday.

In a day of frantic, high-level talks among government and political leaders, central-bank officials, legislators and bank executives, President Nicos Anastasiades tried to forge a compromise over a bank-deposit levy Cyprus must impose in exchange for a €10 billion ($13.07 billion) bailout from its euro-zone partners and the International Monetary Fund.

Uncertain it has the votes to pass the measure, Cyprus’s government postponed an emergency parliamentary session on Sunday that had been called to vote on the levy, while the cabinet petitioned the central bank to extend Monday’s bank holiday by at least another day, a move that was likely.

A “bank-deposit levy?” Here’s what that means: Euro-zone finance ministers had decided to impose a special tax on deposits as part of a deal to reduce the cost of the island’s bailout. According to the plan, bank accounts in Cyprus of €100,000 or more will be taxed at 9.9%, while deposits under that threshold will be taxed 6.75%. The money would be seized directly from the bank accounts, period.

No wonder there’s a run in the banks! Every euro you withdraw is a euro that won’t be subjected to the tax, is a euro which can’t be seized by the government. If you had €200,000 in the bank, and you withdraw it all, you will have saved yourself €19,800. If you managed to withdraw only €120,000, you’d have €80,000 in the bank subject to the tax, but that money would at least be taxed at the lower rate.1

One doesn’t have to be a Nobel Prize in Economics laureate like the esteemed Paul Krugman to figure it out: if the government is going to seize 6.75% or 9.9% or X% of people’s bank accounts, and people have the ability to withdraw their money from the bank before the government can get to it, they sure as Hell will!

The tax will apply to everyone from corporations to school children to foreigners living on the island. As news of the levy spread over the weekend, nervous depositors rushed to cash machines around the island and emptying many of them, while one distraught resident in the southern town of Limassol parked a backhoe in front of a local bank to protest the new levy. But even before Monday’s vote, Cypriot authorities had ordered banks on the island to withhold the levy before handing out any cash.

The anger on the streets remained Sunday despite carnival celebrations that were staged around the island ahead of the Orthodox Clean Monday holiday. Andreas Archontidis, a 50-year-old taxi driver in Nicosia, said many people were afraid their life savings had been lost.

This is about the worst idea of which I have ever heard. If the parliament does vote for the levy, I’d suspect that the members had better all have bodyguards, because that’s the kind of vote that could get a whole lot of them killed. Of course, Cyprus has strict gun control laws disarming it’s subjects citizens, which might make assassinating the members of Parliament more difficult,2 but the good American invention of tar and feathers might suffice.3 But even if the Parliament votes down the levy, the almost certain result will still be a a run on the banks, as Cypriots feared that the vote could be changed and their money seized later. Simply put: they fouled up, big time, regardless of which way the vote goes.
________________________________Update: Monday, 18 March 2013 @ 0844, from from THE WALL STREET JOURNAL:

NICOSIA, Cyprus—Cyprus put off for another day a debate on a controversial bank deposit levy in the country’s parliament—a precondition to receiving a €10 billion bailout—even as it proposed a new plan to ease the burden of that tax on small savers in a bid to win votes for the measure.

Speaking to reporters, Cyprus Parliament speaker Yiannakis Omirou said Monday that the debate and vote would be pushed back to Tuesday—now two days behind schedule—a move that would likely require the country to extend a bank holiday on the island for at least one more day amid fears of a meltdown in the island’s financial system.

“The parliament will convene at 6 p.m. [1600 GMT] tomorrow,” Mr. Omirou told reporters. “The reason is because there now exist amendments to the government legislation that is to be submitted. Consequently, it requires the necessary time in parliament, in the finance committee, to examine these new proposals.”

As negotiations in Nicosia entered a third day, the government was focusing on a new proposal that will aim to raise €5.8 billion ($7.58 billion) for Cyprus’s crisis-hit banks—the same amount already set as a requirement for Cyprus’s bailout—but which would lower the tax on smaller deposits.

According to two European officials familiar with the talks, the new proposal being floated by the government would see smaller depositors, those with up to €100,000, taxed at 3% rate—down from 6.75% as initially envisaged. Savers with €100,000 to €500,000 would be taxed at a 10% rate; and those with over €500,000 taxed at 15%, one official said.

More at the link.
________________________________

The way the JOURNAL article is written, the tax does not seem to be a marginal one, where the first €100,000 would be taxed at 6.75% and the excess taxed at 9.9%.↩

Our Second Amendment possibly being the only think which has kept the Democrats from trying something like this here.↩

During our Revolution, the tar most commonly used was pine tar, which is molten at reasonable temperatures, but if a petroleum tar was used, as it probably would today, the result would be serious, perhaps fatal burns.↩

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